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Transaction Glossary: Share Purchase Agreement (SPA)

The Share Purchase Agreement (SPA) is a crucial contract in the sale of a company share, governing the price, terms, and warranties between the parties involved.

While most of us likely associate the term "SPA" with relaxation, revitalization, and wellness, the same acronym, in a different context, is widely used in business transactions. In today's installment of our Transaction Glossary, we will explore its meaning.

 

SPA stands for "Share Purchase Agreement," which in Czech translates to Smlouva o převodu podílu. For simplicity, shareholders will also be referred to as partners, and the transferred share will encompass both shares and stakes.

 

The purpose of this agreement is to legally regulate the transfer of shares in a company from the seller to the buyer. Its aim is not only to facilitate a successful transfer but also to define all rights and obligations of the parties involved and provide them with necessary guarantees. Ultimately, the buyer, as the new owner of the shares, will adhere to the company's articles of association and remain bound by them.

 

SPA is utilized for both the transfer of shares in limited liability companies and the transfer of shares in joint-stock companies, representing the most fundamental contract regarding the actual transfer of ownership rights associated with a business stake, as no transfer could occur without it. The content of the SPA can be straightforward or relatively complex, but it primarily includes the following sections.

 

Definition of the size or number of shares being transferred

 

The size of the transferred share entirely depends on the agreement between the seller and the buyer and reflects the extent of the buyer's future participation in the company. If there is a sole partner or shareholder in the company, the seller can transfer their entire stake or all shares to the buyer based on the SPA, effectively transferring ownership of the entire company. In the case of multiple partners or shareholders, the SPA provides flexibility for the parties regarding the extent of the share transfer they agree upon, allowing the seller to transfer only a portion of their stake instead of the entire share.

 

It is important to emphasize that before preparing the SPA, the seller must ascertain under what conditions they can transfer their stake to the buyer. They must check whether the articles of association or bylaws contain rules requiring the approval of the general meeting for the transfer or the obligation to first offer the transferred stake to other partners (known as preemptive rights).

 

Purchase price and its payment

 

The purchase price is a key component of the SPA, as it establishes the financial obligation of the buyer and the expectations of the seller. The price may be expressed as a fixed amount or may be linked to the company's performance, which incentivizes the seller for further cooperation.

 

At the same time, it is possible in the SPA to refer to another contract or agreement that specifies the purchase price more precisely. Thus, the purchase price will not be stated (either directly or indirectly) in the SPA and after the SPA is filed in the company's collection of documents. This can be strategically advantageous for partners, as it will not disclose the price at which the business stakes are sold.

 

Warranties of the parties

 

The seller's warranties primarily relate to the condition of the company. This mainly involves a declaration that they have not concealed or intentionally distorted information about the company to the buyer, that due diligence has been properly conducted, and reflects the true state of affairs. The seller may also commit to not engaging in business in the relevant field or cooperating with competitors for a certain period, which ensures protection for the new owner of the stake. The buyer most commonly provides a warranty that they have sufficient financial resources to pay the purchase price and that they are familiar with the state of the company.

 

As with any contract, it is important that the SPA reflects the true intentions of the parties and includes and regulates all the elements that the parties have agreed upon. Recently, there has been a trend in practice to address these matters in a preliminary agreement, which immediately defines all the key conditions of the transaction. The SPA then serves merely as confirmation of previously agreed obligations. Whether you choose either option, we are ready to assist you in ensuring that the SPA truly reflects all your needs and that they are adequately protected.

 

Signing the SPA and related changes in the commercial register

 

In the case of a transfer of shares in a limited liability company, the signatures of the parties (both the seller and the buyer) must be officially verified. Since the SPA results in a change of ownership of the shares, these changes must be reflected in the commercial register. For limited liability companies, the change must always be made, while for joint-stock companies, it is only necessary when the sale of shares results in the creation or termination of the status of a sole shareholder.

 

Final recommendations

 

Given the various rights and obligations that the parties can agree upon in the SPA, we strongly recommend utilizing the services of a lawyer to ensure that the wording of the SPA is legally sound. A properly drafted SPA can provide greater protection for both parties and help prevent issues that may arise in the future regarding the transfer of shares.